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CD Ladders

The name "CD ladder" sounds pretty cryptic, but they're really not so complicated. CD ladders can be a great tool for making the most of your cash, so let's take a close look at them.

What is a CD Ladder?

CDs, as we remember from our CD post, are Certificates of Deposit. You basically agree to leave your money in these accounts for a certain amount of time, usually in return for a better annual percentage yield than you would have gotten otherwise. Of course while your money is locked up in there, the rates could change for the better and you'd be missing out on the superior rate. This is where the idea of CD ladder structuring comes into play.

In a CD ladder, you stagger the maturity date (the date at which you can get your money out of the account), so that you are almost always close to the maturity of one of your CDs. You could, for example, buy a three-year CD every year. Then, even though all of your CDs are three-year CDs, one will always be maturing every year; just re-invest that money in another (hopefully better rate) CD! The upside? You continually benefit from the superior rates CDs offer; but you side-step having all of your cash locked down, because at least one CD will be maturing each year.

Should I Invest in a CD Ladder?

If you're intending to put your cash in CDs, a ladder can offer several advantages over simply buying one CD. By laddering your CDs you can make sure you don't wind up investing at just the wrong time. If for example, you buy one CD right at the low point of interest rates, all your money is locked up at that poor interest rate. By laddering your investments, you increase your ability to take advantage of great interest rates when they come around.

CDs and Your Emergency Fund

Another great reason to use a CD ladder is to make your emergency fund work for you. Rather than leaving your emergency fund in a regular savings account where it will earn practically no interest (particularly in today's economy), you can put it in a ladder of CDs. Because the maturity dates are staggered, you will always have access to enough money to live on in an emergency. Meanwhile, your money is earning better rates than it would otherwise.

Say for example that you need $1,500 to live on every month and you wanted to have a 6 month emergency fund. You could buy one $1,500 six-month CD every month for six months. Now if you lose your job, you will always have access to the money you need, because a CD will mature each month. If nothing bad happens and you don't need the money, just let the CD renew and keep earning higher interest.

What Else Should I Know About CD Ladders?

You are entirely responsible for setting up and maintaining your CD ladder. This doesn't sound too bad, except sometimes banks play nasty tricks. Often, a bank will give a great APY when you first invest; when the time to renew comes around, the rates plummet and you'll be automatically re-enrolled unless you pull your money from the CD. Thus it's important that you keep an eye on your CDs.

Cash investments are very difficult right now. Interest rates are so low it's hard to know what to do with your cash, but a CD ladder can be a great option for any cash you want to hold.

MoneyCone, I have seen the rollover happen to people before -- most banks ask if you want to rollover but just in case, I thought it would be a great tip!

BeatingTheIndex, thanks for the comment! I agree the market can be scary, but I think it can be played cautiously with great returns -- but for keeping some funds liquid, a CD ladder is a great option :)

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